MNI INTERVIEW: BOC Rate Hike Odds Rise With Higher Oil- ATB

The Bank of Canada's comfort in holding interest rates unchanged will be tested if oil prices boosted by war in Iraq feed domestic inflation, potentially setting up the first rate hike since 2023 despite relatively weak growth, former Alberta and federal finance department official Mark Parsons told MNI.

“Now that oil prices have spiked what they're going to be looking for is their pass through to core inflation,” according to Parsons, formerly Alberta's assistant deputy minister of economics and now chief economist at ATB Financial, which is owned by the province. “If so they're going to want to lean against that and potentially raise interest rates.”

“We have thought that the risks to raising and lowering interest rates were about the same, symmetrical, and now we put more weight towards Canada raising rates because inflation increases,” he said.

Governor Tiff Macklem affirmed Wednesday he can hold the target rate at 2.25% if his base case for inflation near 2% and growth around 1% this year holds. Officials cut four times last year even as core CPI lingered near 3% though there has been a slowdown in recent months. That could turn again with oil prices jumping after the U.S. and Israel attacked Iran.

FORCE THEIR HAND

“Are we getting faster food prices, services, going out for dinner, entertainment and things like that? Is everyone kind of passing these costs on, and then that gets sort of embedded into these higher prices? That’s when it becomes problematic,” Parsons said. (See MNI INTERVIEW2: Food Prices Still Problem Across G7- Champagne)

Investors see the Bank holding into 2027 as the economy rebuilds after the hit from U.S tariffs on autos, steel and aluminum. Bank officials say structural swings are better handled by other arms of policy and that interest rates are of limited efficacy in smoothing the adjustment. 

“Given that we have a kind of a weak backdrop for growth, I think the Bank can be somewhat reluctant to raise rates. But if inflation takes off, it could force their hand," Parsons said. He estimates Canada's growth at 1.4% this year and Alberta's at 2.1%. 

Contradictory geopolitical risks also make Bank officials reluctant to adjust policy unless it's clear the economy faces a major shift, he said, pointing to a speech Monday by Deputy Sharon Kozicki.

GIANT WAKE-UP CALL

“There's so many geopolitical factors here, supply chain issues, that we really have to take a data-dependent, wait-and-see approach to setting rates. That is really what I'm getting from all that language, including the speech earlier this week,” Parsons said. (See MNI: Canada's Immigrant Clampdown Deepens BOC Conflicts)

For Alberta, Canada's main oil and gas producer, prices may be sustained at levels high enough to rekindle investment in the province's energy industry, he said. That also requires persistent work by governments to undo perceptions about red tape, he suggested.

“Venezuela and Iran have created this giant wake up call for Canada,” Parson said. “What’s less clear is how much it translates into oil and gas investment. The producers are waiting to see if it’s going to be sustained before they go and change their capital plans.” 

Rebalancing the economy towards investment and away from consumer spending would give the Bank more latitude in the long run, he said. “If we get our productivity sorted out, that makes the Bank of Canada’s job easier because we can grow the economy without inflation.”